Co-authored with FARRIA NAEEM
Remittances have emerged as a key driver of economic growth and poverty reduction in Bangladesh, increasing at an average annual rate of 19 percent in the last 30 years (1979-2008).
Revenues from remittances now exceed various types of foreign exchange inflows, particularly official development assistance and net earnings from exports. The bulk of the remittances are sent by Bangladeshi migrant workers rather than members of the Bangladeshi Diaspora. Currently, 64 percent of annual remittance inflows originate from Middle Eastern nations.
Robust remittance inflows in recent years (annual average growth of 27 percent in FY06-FY08) have been instrumental in maintaining the current account surplus despite widening a trade deficit. This in turn has enabled Bangladesh to maintain a growing level of foreign exchange reserves.
What are the key macroeconomic determinants of remittances in Bangladesh? Based on a simple regression exercise we find that number of workers finding employment abroad every year, oil price, exchange rate and GDP growth are the key determinants of changes in the level of remittance inflow. Our results show that:
• Each additional migrant worker brings in $816 in remittances annually;
• Every dollar increase in oil price increases annual remittance by nearly $15 million;
• Depreciation of exchange rate by one taka increases annual remittance by $18 million and;
• Remittances are higher during periods of low economic growth.
The findings are plausible and consistent with international evidence. In India - another significant remittance recipient county in the South Asia region – migration, oil price, exchange rate and GDP growth has been found to be the salient macroeconomic determinants of remittance inflows as well.
An interesting implication is that the impact of oil price increase on Bangladesh’s balance of payment is unfavorable. A dollar increase in oil price increases oil import payments by about $26 million whereas it increases remittances by $15 million. Thus the impact of a dollar increase in oil price on the balance of payments is a deficit of $11 million.
There is a widespread concern that recent decline in international oil prices and slow down in the global economy, particularly US, Europe and Middle-East are likely to have adverse effects on Bangladesh’s remittance inflows. How bad can it get let’s say next year (FY10)?
Assuming oil prices at around $70 per barrel and GDP growth of 5.5 percent we predict:
• Remittance will grow by 12.4 percent, reaching $10.76 billion, if we are able to export another 610,000 workers (annual average of 2006-2008) in FY10. This is the optimistic case.
• Remittances will grow by 10.2 percent, reaching $10.55 billion, if the outflow of migrant workers in FY10 reverts to levels observed before the recent oil price boom—350,000. This is the base case.
• Remittances will grow by 8.5 percent, reaching $10.38 billion, if the outflow of migrant workers in FY10 is only 50 percent of the base case—150,000.
Not too bad even in the worst case scenario!